Drought to trim Australia's golden fleece

SYDNEY, Sept 18 (Reuters) - Australia on Tuesday trimmed its forecast for wool production by 6 percent as drought across the country's east coast forces farmers to cull sheep despite record prices for their fleece.

In its latest update, Australia's chief commodity forecaster outlined the cost of a prolonged drought across the east coast, weather that casts a shadow over many of the Australia's largest agricultural companies and the wider economy.

While all Australian agriculture is expected to be affected, wool will be one the biggest casualties.

Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) said wool production during the 2018/19 season will now total 404,000 tonnes, down from its June estimate of 430,000 tonnes.

The fall in wool production comes as dry weather across the east coast, which provides about 90 percent of the world's exported fine-wool used in clothing manufacturing, leaves farmers without enough food or water to keep livestock alive.

The east coast, the country's largest sheep rearing area, saw less than 20 percent of typical rainfall between June 1 and Aug. 31, leaving farmers with little choice but to sell sheep for slaughter.

With Australian wool production is set to fall, ABARES said local prices will hit a record A$19.90 a kg, adding pressure on manufacturers who have seen retail margins shrink amid intense competition.

DROUGHT WILTS CATTLE MARKET

Drought conditions across Australia's east coast will also damage the country's cattle industry.

ABARES said on Tuesday 8.345 million head of cattle will be slaughtered during the 2018/19 season, a rise of nearly 2 percent from a previous forecast in June of 8.2 million animals.

Despite the increase in slaughterings, ABARES lowered its forecast for beef production as drought conditions force farmers to cull younger, smaller livestock.

ABARES said Australian beef production during the year would total 2.303 million tonnes, down from the June estimate of 2.305 million tonnes.

Without enough food or water, the number of cows slaughtered in Queensland during July hit a three-year high, totalling nearly 350,000 animals, the most recent data from Australia's Bureau of Statistics show.

But the upturn in slaughterings leaves Australia reliant on Asian demand.

Demand from the world's largest importer of beef, United States, has softened, while major exporters such as Brazil are rapidly expanding production.

"The United States is our traditional market for sales when we are in liquidation phase but it is quite full. Sales to Korea, Japan and China are up since August so Australia will need to see that demand remain," said Angus Gidley-Baird, senior analyst, Rabobank,

Meanwhile drought conditions are also expected to trim Australian dairy production, ABARES said.

ABARES said milk output during the year will total 9.327 billion litres, down from its June forecast of 9.37 billion.

The expected fall adds pressure on the country's largest milk processors, Saputo Inc, Fonterra and Bega Cheese Ltd, which have seen profits squeezed by intense local competition for milk supplies.